Williams-Sonoma, Inc. (WSM) Q1 2024 Earnings Report, Transcript and Summary

Welcome to the Williams-Sonoma, Inc. First Quarter Fiscal 2024 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Jeremy Brooks, Chief Accounting Officer and Head of Investor Relations. Please go ahead.

Good morning, and thank you for joining our first quarter earnings call. Before we get started, I'd like to remind you that during this call, we will make forward-looking statements with respect to future events and financial performance, including our updated guidance for fiscal '24 and our long-term outlook. We believe these statements reflect our best estimates. However, we cannot make any assurances these statements will materialize and actual results may differ significantly from our expectations. The company undertakes no obligation to publicly update or revise any of these statements to reflect events or circumstances that may arise after today's call. Additionally, for the first quarter of last year, we will refer to certain non-GAAP financial measures. These measures should not be considered replacements for and should be read together with our GAAP results. A detailed reconciliation of non-GAAP measures to the most directly comparable GAAP measure appears in Exhibit 1 to the press release we issued earlier this morning. Also, for the first quarter of this year, we will refer to our GAAP results, both with and without the benefit of an out-of-period adjustment that we recorded during the first quarter. We believe providing these disclosures is useful to understanding our quarterly financial results. Jeff will share the details of this adjustment later in his prepared remarks. This call should also be considered in conjunction with our filings with the SEC. And finally, a replay of this call will be available on our Investor Relations website. Now I'd like to turn the call over to Laura Alber, our President and Chief Executive Officer.

Thank you, Jeremy. Good morning, everyone. Thank you for joining the call. Before we review our Q1 results, I want to take a moment to thank all of our teams around the globe for their consistent contributions to our company. We could not continue to produce strong earnings without their cross-functional collaboration and dedication. We are pleased to deliver strong results in the first quarter of 2024, driven by an improving top line trend and continued strength in our profitability. In Q1, our comps came in above expectations at negative 4.9%, and we exceeded profitability estimates with an operating margin of 19.5% and earnings per share of $4.07. It is important to note that the results of the first quarter include a benefit of $49 million, resulting from the reversal of freight-related accruals that we determined were not required, which contributed 290 basis points to our operating margin and $0.59 to our EPS. Jeff will walk you through this in more detail, but it is worth noting that even without the impact of this benefit, we significantly exceeded profitability expectations. As a result of our outperformance, we are raising our outlook on operating margin to now be in the range of 17.6% to 18% or 17% to 17.4%, when excluding the impact of the freight accrual reversal. The strong results for the quarter are a result of our focus on our 3 key priorities in 2024: returning to growth; elevating our world-class customer service; and driving margin. I'll start first with returning to growth. We are pleased with the improvement in our top line trends and our market share gains in Q1. We are keenly focused on innovation in our product line across brands. And our unique in-house design capabilities and vertically integrated sourcing organizations allows us to offer this high-quality design innovation at compelling price points. Another key component of our return-to-growth strategy is our marketing capabilities. Our in-house digital marketing optimization backed by our world-class customer analytics and our first-party data collection serves as a competitive advantage for our company. In the quarter, we increased our ad spend and invested in both our paid marketing and our proven social strategy. This investment allowed us to drive sales improvement to acquire new customers and to gain market share. Additionally, we are continuing to improve our online experience through our investment in our proprietary e-commerce technology. From product discovery and selection to personalization to concept to customer care and to the final mile, our team is constantly thinking about how we can improve our best-in-class e-commerce experience. And one way we do this is through AI. We believe our leadership in AI will be another competitive advantage. And it's important to not forget that as focused as we are on our digital capabilities, we are passionate about our service and our best-in-class retail business. We have improved our in-store experience with inspirational products, improved in-stock inventory levels and next level in-store services. Our teams are the best in retail, and our retail optimization efforts are transforming our fleet to be positioned in the most profitable, inspiring and strategic locations. Moving to our second and third key priorities in 2024, which are inextricably intertwined. We continue to make progress improving our world-class customer service and driving margins. The customer is at the center of everything we do, and their satisfaction is key to our operating performance. We are pleased with our high Net Promoter Scores, both in-store and in home, but we see more opportunity to improve. We know that providing our associates with new tools and training has a direct impact on our customer experience. And we are thrilled to bring back our annual store manager conference in Q2 of this year. This multi-day offsite meeting is an opportunity for all of our store managers to participate in strategic training. The improvement in customer service also comes from supply chain efficiencies. We are reducing costs by limiting out of market and multiple shipments, fewer customer accommodations, lower returns and damages and reduce replacements. These improvements will continue to contribute meaningfully to our profitability in 2024 and beyond. And our ongoing commitment to not running site-wide promotions and the reduction of our promotional offerings have also improved margins. We are focused on delivering our compelling value equation to our customers, which in turn, maximizes our full price selling. Now I'd like to update you on the performance of our brands. Pottery Barn ran a negative 10.8% comp in Q1. We continue to see softness in higher ticket furniture sales in Pottery Barn, but we've seen quarter-over-quarter improvement. We're having success in our proprietary print and pattern across textiles and easy decorating updates continue to drive sales. Highlights include newness in our Bloom shop, frames and decor. Our strength in seasonal celebrations also continues to resonate with our customers. In March, we launched our first ever global collaboration with international icon, Deepika Padukone. Her popularity drove 1 billion impressions for the Pottery Barn brand. Customers also embrace the launch of our Coastal Lookbook, and they positively engaged with our newly developed apps. In the back half of this year, we're excited to introduce new innovation, both in-store with compelling new floor sets and online with improved digital shopping experience. The Pottery Barn children's business ran a positive 2.8% comp in Q1. Across these life-stage businesses, we drove widespread comp trend improvement in the business. We've seen excellent customer response to our new product introductions with collaborations being a particular highlight. Our recent launches with partners such as LoveShackFancy and Lilly Pulitzer have driven sales and attracted new customers by tapping into relevant fashion and home decor trends. In Baby, we're seeing double-digit registry growth and excellent customer response to our expanded essentials and gifting. In dorm, we recently launched our biggest collection to date with expanded XL twin bedding options, new no-nails wall decor and innovative storage solutions. In addition to the expanded assortment, we are excited to roll out improved dorm product selection functionality. And customers can also ship dorm products to any one of our company-owned stores near their college campus. Moving to West Elm. In Q1, West Elm drove sequential improvement in its top line trend, running a negative 4.1% comp in the quarter. We're encouraged to see improvement in West Elm's demand trend even as we materially pull back on promotions. We are seeing strength in our new product sales with our spring units driving positive comp to last year, with particularly strong performance out of furniture, kids and decorative accessories. Summer newness is also off to a great start with double and triple-digit newness comps. Given the positive trends in newness, we have a sizable opportunity in West Elm as it rebalances more inventory into these new products. The Williams-Sonoma brand ran a positive 0.9% comp in Q1. This is the second consecutive quarter the Williams-Sonoma brand ran a positive comp with the Williams-Sonoma Kitchen business running a positive comp for the fourth consecutive quarter. During Q1, we inspired customers with exclusive and innovative products. We benefited from new introductions of Williams-Sonoma branded products in categories like bakeware, cutlery and food. The favorable customer response to these items continues to reinforce the opportunity we have to the Williams-Sonoma branded business. In March, our co-branded collaborations drove media attention and results. Our popular collaboration with Aerin Lauder was expanded to include new items for both Williams-Sonoma and Williams-Sonoma Home. We also partnered with Trisha Yearwood to make our best-selling cocktail collaboration the official drink of our new 55,000 square foot bar and restaurant in Nashville that she built with her husband, Garth Brooks. Now I'd like to update you on our other initiatives. Business-to-business grew 10% in Q1, driving record-breaking demand in the quarter. We saw improvement in our trade business, running a positive 6% on the quarter, along with continued momentum in our contract business, which represents about 1/3 of the B2B business up 18%. We're encouraged by our diverse book of businesses ranging from sofas for UT San Diego dorms to corporate gifting for Pebble Beach Company. We also saw continued growth for our existing large project customers such as Marriott, Dave & Buster's and Jamestown properties. Now I'd like to talk about our global business. Despite ongoing macroeconomic pressures impacting our global business, we're pleased with the performance in key markets, including India, Canada and Mexico. In India, we are continuing to see strong growth from increased marketing and brand awareness campaigns across the brands. In Canada, our business is thriving in both the retail and direct-to-consumer channels, driven by enhanced omnichannel strategy, wider product selection and the expansion of our business-to-business program across all brands in the market. And in Mexico, the market showed strength driven by a focus on the design business and expanded assortment fueled by our improved stock position. We will continue to leverage the knowledge gained from these markets to enhance the global customer experience in our new and emerging markets. Lastly, I'd like to update you on emerging brands. Rejuvenation delivered another double-digit quarter. We saw all categories drive growth and continue to see success with both consumer and trade customers. The brand remains focused on delivering high-quality products that support your home remodel and refresh projects. The strongest performance comes from bath, hardware and lighting, while we also see strength in several of our new growth categories like textiles, organization, window hardware and outdoor. Customers continue to update their homes, specifically in the kitchen and bath spaces and add the finishing touches with Rejuvenation. We are excited by the momentum in this brand and the growth potential this year and beyond. Mark and Graham, our monogram gifting business, also drove a double-digit comp growth in Q1. The brand is increasingly recognized as an inspirational lifestyle brand experiencing continued growth as a go-to destination for gifts, including graduations and weddings. Q2 has started strong with a positive reception to the brand's Mother's Day and Father's Day gift selections. And finally, GreenRow, our newest brand, continues to grow and expand its assortment of vintage-inspired colorful furnishings that are sustainably sourced and designed to last. The second catalog dropped this month with a focus on print and pattern. We are seeing a very positive response to its unique offerings in the market and look forward to seeing additional assortment expansions and partnerships in the coming months. Being successful in exciting emerging brands demonstrate our ability to develop new businesses that expand our portfolio and address white space in the market. In summary, we are extremely proud of our results. During the last few years, we, as a company, have navigated, learned, optimized and built all in preparation for our next chapter of growth. We have a strong omnichannel platform with an exclusive lifestyle offering and a sophisticated distribution network with additional capacity. We recognize that there is continued uncertainty with the environment and the consumer. But because we operate in a highly fragmented market, we will continue to gain share by inspiring and servicing our customers. We remain committed to driving our 3 key priorities in 2024: one, returning to growth; two, elevating our world-class customer service; and three, driving margins. And with that, I will turn it over to Jeff to walk you through the numbers and our outlook in more detail.

Thank you, Laura, and good morning, everyone. We are pleased to deliver these strong Q1 results. We've seen sequential improvement in our top line trend and we continue to exceed expectations on the bottom line. As Laura said, our results this quarter reflect 3 keys we've laid out for fiscal year '24. First, returning to growth, fueled by our brand strategies, emerging brand opportunities, business-to-business expansion and global footprint; second, elevating our world-class service, which drives both customer retention and expense savings; and finally, third, driving earnings as we continue to deliver strong profitability. These 3 themes resonate across our earnings today. And given our strong Q1 results, we're confident we can deliver long-term growth and even stronger earnings as the customer shifts back to home. Now let's dive into the numbers. I'll start with our Q1 results and then provide an update on guidance for '24. Net revenues finished at $1.66 billion, in line with our expectations. Our comp of negative 4.9% sequentially improved quarter-over-quarter. We saw better performance across both furniture and nonfurniture categories even as we reduced our overall level of promotions from last year. From a cadence perspective, our trends were relatively consistent across the quarter. Moving down the income statement. Gross margin came in at 48.3%, which includes a $49 million or 290 basis point benefit from an out-of-period adjustment. Subsequent to filing our 10-K, we identified that we over accrued freight expense across fiscal years 2021, 2022 and 2023 by $49 million. Following the prescribed accounting rules, we determined the over accrual was not material to any prior period and not material to our projected full year '24 results. Therefore, we recorded the correction in Q1 as an out-of-period adjustment that benefited our results this quarter. Without the out-of-period adjustment, gross margin came in at 45.4%, 680 basis points higher than last year and substantially exceeding expectations. There were 3 drivers to the 680 basis point improvement. First, merchandise margins improved 470 basis points, driven by lower ocean freight as we benefited from lapping last year's pandemic-related ocean freight runoff and our ongoing commitment to full-price selling. Second, supply chain efficiencies contributed 240 basis points, driven by lower than pre-pandemic returns, accommodations, damages, replacements, out-of-market shipping and multiple deliveries per order. These supply change efficiencies are yielding a notable improvement in customer service and cost savings. And third, occupancy costs, although down 3% from last year, deleveraged 30 basis points. We continue to optimize our retail fleet, while we invest in our world-class technology stack and our supply chain. Wrapping up our gross margin, we delivered substantially higher gross margin this quarter, driven by better merchandise margins, supply chain efficiencies and lower occupancy costs. Turning now to SG&A. SG&A expense came in at 28.8% of revenues or 310 basis points higher than last year, driven by higher advertising spend, and incentive compensation. Advertising expense deleveraged 170 basis points as we continue to invest into higher levels of advertising spend to drive sales at an efficient return. Our multi-brand portfolio allows us to test the return of this incremental spend. Our own hands-on-keyboard approach allows our investment to go further, keeps our learnings in-house and gives us a competitive advantage in the home furnishings industry. Employment expense was 100 basis points higher year-over-year, driven entirely by higher performance-based incentive compensation. Without incentive compensation, employment was flat year-over-year on a rate basis. In Q1, we continue to manage variable employment costs across our stores, distribution centers and customer care centers in accordance with top line trends. On the bottom line, our earnings significantly exceeded expectations. Including the benefit from the out-of-period adjustment, operating income came in at $323.8 million; operating margin was 19.5%; and diluted earnings per share was $4.07. The out-of-period adjustment increased operating income by $49 million; operating margin by 290 basis points; and earnings per share by $0.59. Without the out-of-period adjustment, our earnings still significantly exceeded expectations. Operating income came in at $274.8 million; operating margin was 16.6%, 370 basis points above last year; and diluted earnings per share was $3.48, up $0.84 or 32% year-over-year. On the balance sheet, we ended the quarter with a cash balance of $1.3 billion with no debt outstanding. This was after we invested $40 million in capital expenditures supporting our long-term growth, and we returned $107 million to our shareholders through quarterly dividends and share repurchases. Merchandise inventories ended the quarter at $1.2 billion, down 13% to last year. Overall, our inventories are well positioned to support our business. Summing up our Q1 results. We're proud to have delivered another quarter of earnings substantially exceeding expectations. I'd like to thank our talented dedicated team at Williams-Sonoma, Inc. for delivering these outstanding results. Now let's turn to our '24 outlook. Given our Q1 results, we are reiterating our revenue guidance and raising our operating margin guidance for fiscal year '24. On the top line, we continue to expect full year '24 net revenues to be in the range of down 3% to up 3%, with comps between down 4.5% to up 1.5%. We anticipate sequential improvement across the year, with the first half tougher than the second half as our top line comparisons get easier and our growth drivers accelerate. On the bottom line, we are raising our guidance based upon our Q1 results, but anticipate our operating margins going forward will be relatively in line with '23 results. We are raising our operating margin guidance to a range of 17.6% to 18%, which includes a 60 basis point benefit from the full year impact of the out-of-period adjustment. Without the out-of-period adjustment, we expect our full year operating margin will be in the range of 17% to 17.4%, a raise of 50 basis points due to our strong Q1 results. Additionally, we expect our full year interest income to be approximately $40 million and our full year effective tax rate to be approximately 25.5%. As a reminder, 2024 is a 53-week year for Williams-Sonoma, Inc. So the fourth quarter will consist of 14 weeks. We anticipate the additional week will contribute 150 basis points to revenue growth and 10 basis points to operating margins, both of which are embedded in our guidance. We will report comps on a 53-week versus 53-week comparable basis. All other year-over-year compares will be 53 weeks versus 52 weeks. Our capital allocation plans for '24 remain unchanged. We expect to spend $225 million in capital expenditures to invest in the long-term growth of our business. 75% of this capital spend will be dedicated to drive our e-commerce leadership and supply chain efficiency. We remain committed to returning excess cash to our shareholders in the form of increased quarterly dividend payouts and ongoing share repurchases. For dividends, in March, we announced an increase in our quarterly dividend payout of 26% or $0.23 to $1.13 per share. Fiscal year '24 will be the 15th consecutive year of increased dividend payouts, which we are both proud of and remain committed to. For share repurchases, we have $956 million remaining under our $1 billion share repurchase authorization through which we will opportunistically repurchase our stock to deliver returns to our shareholders. As we look further into the future beyond '24, we are reiterating our long-term guidance of mid- to high single-digit revenue growth with operating margins in the mid- to high teens. We're confident we'll continue to outperform our peers and deliver shareholder growth for these 5 reasons that remain consistent: our ability to gain market share in the fragmented home furnishings industry; the strength of our in-house proprietary design; the competitive advantage of our digital-first but not digital-only channel strategy; the ongoing strength of our growth initiatives; and the resiliency of our fortress balance sheet. With that, I'll open the call for questions.

[Operator Instructions] Your first question comes from the line of Kate McShane with Goldman Sachs.

I have one kind of bigger picture question and then one question with regards to the accounting that was stated today. So first, we wondered if you could talk a little bit more about the big ticket trends you're seeing. I know you noted better performance in furniture. But we're curious to build down on that a little bit more in terms of what you saw in Q1 versus maybe what you were seeing in Q4. And then with regards to the accounting, we're wondering with regards to the COGS change, why it's only '21 through '23 and why there's not an impact to Q1 '24.

Kate, it's Laura. In terms of big ticket, Q4 is not a big furniture time of the year. Of course, the comps are comparable. We don't bring in a lot of newness in Q4. But we are seeing improvements in our furniture business, and high ticket has always been one of those things -- you have to remember, we have electrics in high ticket, we have a lot of other types of products in high ticket that aren't furniture. But we haven't seen a trend in high softness, we've seen more of a furniture softness trend that appears to be better. We have some really wonderful selling on new products in the spring and summer season that are both in Pottery Barn and in West Elm. And then also, we're seeing better performance out of our kids furniture business, where we introduced new finishes, which make a huge difference to these furniture collections and also they have categories in the children's home furnishings business that naturally have a lot of growth. For example, dorm and then also Baby. And those are more life stage versus housing related. So we're seeing more firmness there.

All right, Kate, I'll take the second question on the accounting. So you asked why it's only '21 through '23 and not '24. I think for some context, what really drove the out-of-period adjustment was the supply chain volatility that happened during the pandemic, which really hit years '21 through '23. And just to remind everyone, the pandemic put tremendous pressure on international supply chains. We faced disruption, delays, material cost swings, contract renegotiations, changes in terms by vendors, balance renegotiations, and all these pressures added a layer of complexity to the already imprecise process we use to estimate freight expense. So it was really pandemic-driven and it would not have impacted Q1 '24, because as we cleaned up our balance sheet and reconciled our approval, it would just cancel itself out in Q1.

Your next question comes from the line of Christopher Horvers with JPMorgan.

So my first question is, what your early reads are on the outdoor category. Obviously, that's a bigger portion of the second quarter versus Sonoma really shining around the Easter holiday and it looks like April was pretty tough on the weather. So would you expect some of that outdoor category to shift into the second quarter? And sort of related to Kate's question, as you think about like the sequential improvement in the business, mix will have an effect. So does the weather shift maybe to 2Q sort of offset the fact that the mix of Williams-Sonoma is lower in the second quarter?

Chris, it's Laura. The outdoor category gets consistent -- is consistent with the performance of our furniture categories, okay? It's not -- it's about the same. And the curve, if you're referring to the curve of sales, it's more like before the pandemic than when the pandemic happened, immediately after when it was an early rush to get the home furniture -- to get the outdoor furniture. Now it's a more normalized curve, and we have a really pretty good handle on where we think this is going to end up, and it's embedded in our guidance.

I would also just add, Chris, that I know there's been a lot of talk out there in the industry about the impact of weather. We're not really seeing that impact. I think because we are predominantly online, the weather doesn't impact us the same way. So we don't see that as an impact on a shift between quarters, as you alluded to.

Got it. And then just on the margin. I know you don't guide by quarters, but typically, the back half of the year is a much higher operating margin period than the first half of the year. And you don't guide by quarter, but it would imply -- it would seem to imply that you don't get that historical uptick in the back half based on where you guided the year. It seems like you, in large part, just passed along the first quarter beat on the margin side. So is that a fair assessment of how you approach the year guidance? And was there anything unique in the first quarter then that is perhaps not sustainable?

Yes, Chris. I think you hit the nail on the head in that, there were some unique things in Q1, and it really comes down to what we're up against from a last year compare basis. Let's remember that in Q1 last year, Q1 '22 was the high point of our supply chain headwinds, which really benefited us the most in Q1, and we're quickly coming to the end of that benefit. And we're lapping starting in Q2 and even stronger in Q3 and Q4, more benefits that we had last year from those headwinds. Additionally, we also started to lap the benefit we saw last year from our focus on full price selling and supply chain efficiencies. And while we feel great about our results, let's remember, it's early in the year. There's a lot of uncertainty. So that's why we're guiding our full year operating margins to be essentially flat year-over-year Q2 through Q4.

Your next question comes from the line of Cristina Fernández with Telsey Advisory Group.

Congratulations on the good results. I wanted to ask also a big picture question around demand. You call out trade in B2B up 6%. I think that hasn't been up in a few quarters. And the bigger -- sort of the furniture trends getting slightly better, do you feel it's a function of your consumer that's more fluent, feeling better about spending on the home or just more company-specific initiatives that are driving those results?

No, I think that we -- I know that we've been focused on what we can control. And as we've said in the beginning of the year and last year, we're not planning and we are not dependent what's going to happen in the macro. I mean, who knows what's going to happen in the macro. We're paying attention to what we can control, which is innovation. And innovation -- the right product, the right price, shown beautifully. We've improved the photography in our brands. We've improved the website functionality, and we're looking very closely at how we improve what happens in our stores. Our stores are billboards for our brands. And when you go in now, you're expecting to be able to take things home the minute you go in, not wait for things. And so we've stocked them higher and we've made sure that there's enough newness in our stores to drive excitement again. And those are some of the things that we're really seeing improve our results. As far as B2B goes, remember, there's 2 parts to this business, trade and contract. And the contract business is less dependent on housing and consumer. And we have some great wins in the verticals that we're focused on, both in hospitality, sports and entertainment. And the key point here is that B2B is really a very important strategic initiative for us and a huge part of our growth in the future, because it's such a fractured market and nobody has much share and it is quite big. And it leverages our brands, our ability to design for individual clients, our global sourcing capabilities and our ability to service people with single deliveries versus having things come from a bunch of different suppliers. So we continue to be very confident about B2B and it is less affected by what's going on with housing.

And then as a follow-up, you called out some of the growth initiatives accelerating through the year, given your confidence to hit the full year guide. Can you talk about which initiatives are more impactful as we move through the year?

Sure. I think the first one, our brands are amazing, high-quality. We design our own products and we have our own proprietary website, West Elm, and the return to growth in West Elm is a big part of our focus. And I could not be more excited about what we're seeing in terms of West Elm reads on newness and where the team is going, the high-quality collaborations that we have in the back year -- half of the year. And also just building on what's working now and getting back in stock and being more confident with this new modern aesthetic that we are giving to our customers. The other part of West Elm that I think is very important to note is, it's been predominantly a big furniture business. And we know that for repeat purchases and excitement, you want to have things that people can buy to update their health for a dinner party or just to change the way the living room looks with new pillows. And so we've been very focused on smalls, when I say that, the things that are easier to buy, easy updates for the home. And we're going to continue to push that percent to total which is good for new customer acquisition. So West Elm is a key part of our growth strategy in the back half. Of course, I'm really excited about what we're seeing with our new Williams-Sonoma launches. I don't know if you've been able to go to our website, but we have a new gorgeous navy Jura collection, which is exclusive to us in the market. And another example of extremely impactful collaborations is our collaboration with Shondaland and Netflix's Bridgerton, which is doing very well. And as you know, Bridgerton is the most watched show right now on Netflix. So we're excited to have hit that nail on the head. Our kids and teen businesses, collaborations are a big part of that comp growth, and we have more in store and building on those. And of course, the carve-out of Baby and dorm, so good. And then in Pottery Barn, we're seeing some really nice new collection selling, as I referenced earlier, that we're building on for the fall season. And very beautiful floor sets for fall and then, of course, holiday, where we own decorating and entertaining. Not anybody else does what we do in a high-quality way for the holidays. So those are our big brands. And then, of course, our emerging brands, I touched on. Really nice momentum, very different aesthetically, serving a different way to entertain and decorate. And we've seen double-digit comp growth in those brands and are really pushing the growth for those in the future.

Your next question comes from the line of Michael Lasser with UBS.

This is Dan Silverstein on for Michael.

I'm sorry, we -- yes, yes, yes. Sorry, we got our lines crossed. This is Michael Lasser. Our question is, if you continue to outperform by the magnitude that you did in the first quarter, would you look to reinvest that back into demand-driving initiatives or would you let it flow to the bottom line?

We're always investing in demand-driving initiatives. We're very aggressive about that. And the key is where it really drives incremental sales versus trading sales or just spending more money. So we're very disciplined in how we look at our investments. That's why we have industry-leading ROIC. And the obvious places you invest, as you saw us do was in ad costs. That's the biggest thing. In terms of big investments, we've mentioned our supply chain is built for more volume than we have. And our proprietary e-commerce platform is -- they are -- it doesn't require the kind of step up investment that other people had to put in because it's -- we've been doing it for so long. We have such a big percent of total in e-commerce already. So it's not a new thing for us. It's something that we can just build incremental adds to that are helpful to the customer experience. So it's -- when you say incremental investment to drive demand in the short term, that is ad costs. Promos are not something in our vernacular anymore. We do take markdowns, but that is the demand-driving way that other people take and it is not one that is sustainable in our opinion.

Very helpful. Two follow-ups on that. Can you quantify how much you will be investing in advertising this year, either as a percentage of sales or the dollar amount? And where does full-price selling stand today across the different brands versus where that same percentage was prior to the pandemic?

We're fighting over your question. Yes. So in terms of ad costs, I wish we knew. It's so dynamic and we're so lucky to have this amazing team that's so sophisticated at looking at the different ad cost streams and reading the results. And it's a lot about the bids from others and where the demand is going and where it's not because what is true today might not be true in a month. So we have a monthly long full-day meeting where we review every brand and every stream. And we put our investments down where we're seeing returns. We test in one brand and roll it out to others. Jeff can put this more in context, if you want, on the ad cost?

Yes. I think it's also just important to remember, as you know, we guide the top line revenues and bottom line operating margin because it gives us flexibility to respond to changes in the business. And as everyone's seen, we know the levers to pull to deliver results. So while we'll go through the year, it's a very uncertain environment, who knows how the year shapes out, but we can adjust our levers as we see the trends develop to deliver results for our shareholders.

And then in terms of full price selling -- did you want me to...

Yes, yes, for sure. Yes.

Thank you. That is a number we haven't given, but it's significant over last year.

Your next question comes from the line of Steven Zaccone with Citi.

Laura, I wanted to ask a macro question. We've seen some improved data points in the furnishing space. and you've mentioned the furniture softness appears to be getting better. So I'm curious for your assessment of like replacement cycles in the industry and this concept of like easy wins with people purchasing on smaller ticket items. Do you think we're starting to see some glimpses of replacement cycle and spending on the home. Curious of your assessment.

I have no idea. I think that everyone believes that the interest rates are never going to change, they're going to be more likely to buy than if they believe they're going to go down, they're going to wait. That's one theory I have. But that's just a theory. You can't prove anything. What I know is that where we have innovative products that's priced right, we're winning. And that's exciting to see because that makes me feel like we're more in control than at the whim of the macro. I mean, but imagine like right now, we produced these results in Q1 with the soft housing environment. Imagine what it could be like when it turns. But when that's going to happen, your guess is as good as mine.

Okay. Fair enough. Jeff, a question for you. On gross margin, you've had a lot of strength. Could we talk a little bit about the multiyear opportunity from here? Maybe following up on Michael's question, full-price selling is up relative to last year. Is there opportunity for that to still go higher from here?

Well, as you know, as I said before, we don't guide to specific lines and our overall operating margin guidance for the balance of the year is essentially to be flat year-over-year. There is more opportunity potentially in gross margin, particularly from supply chain efficiencies and higher full-price selling. But we are starting to lap the benefit we had last year from coming up against the headwinds I talked so much about. And as Laura mentioned, we have levers to pull, and there's a chance that if our gross margin was higher, then there's more opportunity to reinvest back in the business to drive the top line if we see efficient returns from that investment.

Your next question comes from the line of Seth Basham with Wedbush.

Congrats on continued strong results. My question is a follow-up on the last one. Just thinking about all the supply chain margin benefits that you've gotten over the last couple of quarters. Can you give us a little bit more insight into the key drivers there and the initiatives you have to further improve your outbound supply chain in the U.S.?

Yes, absolutely. Our goal is perfect order, damage-free, on time. And although we have really improved things from the pandemic and, in some cases, hit customer service records, there's still a lot of room to go. And that is the focus of our supply chain team. We did have, as you know, last year, a lot of increases in inbound freight detention demurrage. We're no longer incurring those dramatically high costs. In terms of service, the team is really focused on a very low return replacement rate, and we are digging into and root-causing every single incident that we have to make sure that, that is not happening again, and that's going to continue to go throughout the year and beyond. And getting the inventory in the right place helps us incur less out-of-market multiple shipments. And honestly, there's still room to do more of that as we further optimize our inventory buys by DC. And honestly, there are redundancies that we're finding and better ways to ship things with our use of AI, looking at orders and figuring out whether we want to optimize for speed or cost or what we want to do for that individual customer in an automated way. So we're making -- we've made investments in supply chain. You know that we opened our Arizona DC. I'm pleased to tell you that it's up and running. And that should give us an advantage at time in the back half when we hit our peak season this year and closer to our West Coast customers. So we have, in previous quarters absorbed some of those costs. And truthfully, a lot of people ship apparel and floor goods as well. There's not a lot of people who can ship furniture well and do it efficiently. And it's not only a huge margin driver for us, and we do it well. It's also incredibly good for customer service. And I've always said, the person who can deliver the order will win this whole market because it is a very frustrating experience to not receive your furniture on time and damage-free, and it's very difficult to do. So I'm thrilled with our progress, but truth is, there's still a lot more to do to hit that perfect order.

That's really helpful color. And then my follow-up question is just on the incentive compensation margin headwind this quarter. Was part of that accrual associated with the out-of-period adjustment or is it for the underlying results? And how should we think about incentive compensation year-over-year for the balance of the year based on your guidance?

Great question, Seth. So the incentive compensation did not include any benefit from the out-of-period adjustment. It was simply our beat in Q1 versus our budget, so we had to take up the accrual. And any additional results from incentive compensation are essentially embedded in our guidance.

Your next question comes from the line of Max Rakhlenko with TD Cowen.

Congrats on the nice results. So first, can you speak to your level of confidence in Williams-Sonoma's ability to regain lost market share on the upswing? And if peers do remain promotional even when demand improves, how will that impact your own strategy as it could make regaining some of that market share tougher?

No, Max, as you know, this is such a fractured market. And there's not really anybody who owns very much share that hasn't moved that much. But the thing that I'm very confident about is the amount that's still done in retail stores, mom-and-pops versus online. And it's going to be very hard for people to scale online like we have already. And so that is the big key competitive moat that we have as we look to the future, because I know that it won't be such a low number that is transacted online in the future. When that happens, it's coming to us. So I worry less about some of these other things that people bring up. And I also know that there's no one who's really designing their own product from soups to nuts like we do in a lifestyle format, which is the other huge advantage that we have. And that gives us pricing power. It's not that we're trying to overprice things, in fact, our value is fantastic. And in each of our brands, you can look at some of the new bestsellers and the price is so sharp because the competitive set has nothing like it or it's only done in the highest end designer markets. So without going through our competitive bestsellers with everybody on the call, including our competition, I will tell you that the things that are really working, you cannot find a similar product in the market anywhere close to our prices. So I don't worry as much about the up-down pricing because I think our consumers -- especially our consumer is extremely smart. They shop around, and they know what they're getting and they also know the quality differential.

I would also just add in that we compete not just on price, we compete on quality as well. But even more importantly, we compete on service. And these investments we're making in service really resonate with the customer and help with customer retention and are as strong a driver of our customers' purchase decisions as price is.

Got it. That's super helpful. And then just a quick follow-up, but any color on quarter-to-date, how has May gone for you guys? Is it more of the same with stability? Or are you potentially seeing any further improvement?

Yes. So quarter-to-date, difference than last quarter, we're only like 3 weeks in. So when we gave Q4, we had 6 weeks, and we were more confident talking about it. And our big weeks are ahead of us. So we're still very confident in our guidance, but I wouldn't read too much into the first 3 weeks, which is why I don't want to comment on it.

Your next question comes from the line of Brian Nagel with Oppenheimer.

Congrats on another really nice quarter. Very nicely done. So the question I have -- look, I think it's -- I'll move it to one question, but maybe bigger picture. So here, we're watching your model unfold here. I mean, sales, top line trends, are -- you're still soft, maybe getting better but still soft, but you continue to have these operating margin increases. So I guess the question I have here is, as you look out recognizing you don't know for certain when -- at what point the top line trends will renormalize, get back to the normalized growth rates for your company, your brands, but is there any reason to believe that you -- as that happens, you wouldn't continue to get a significant leverage through that P&L?

I understand the question, Brian. Thanks for asking it. I wish it was easy to say that for every 100 basis points of comp, x basis points would drop to the bottom line. Certainly, my Monday morning meetings would go a lot easier. But it's just not that way, there's a lot of different levers in the business. And time will tell, which is why our long-term guidance is mid- to high-teens operating margins, and we still feel comfortable in that range.

Okay. So -- I appreciate that, Jeff. Maybe I will slip in one more question, just broader sector-wise. Again, you've done a nice -- very nice job managing your promotions. What are you seeing promotionally out there that you're competing with, so to say? Is it still aggressive? Is it getting more aggressive? Any change on that?

Yes, it's very aggressive. I looked -- when we look across the board, you can see that a lot of the specialty smaller brands are 20% off the whole site, just take a browse through the names. And I'm talking everything. And then some of the bigger specialties have 20% off the whole category, not just things that are still moving, but the whole category. People are playing with shipping. They're playing with double rewards. They have e-mail offers in the department stores that are 25% off if you give me your e-mail. So it is extremely aggressive out there and particularly in certain categories where that is the only thing people know how to do. And that's -- I don't -- that's the way it's been. I don't remember a time in my career that it hasn't been promotional. It is what it is. It doesn't appear to be getting less at all.

Your next question comes from the line of Oliver Wintermantel with Evercore ISI.

Yes. And I just want to get back to the long-term guidance and then the guide for this year on your mid to high teens long-term operating margin and then this year's guide of 17% to 17.4% without the adjustment. That sounds very, very consistent. Is that the messaging? Or how can you -- can you maybe explain how you think about your longer-term margin versus today's margin guide for the year?

Yes. When we think about our current operating margin guidance, our long term operating margin guidance, I think the key point is our operating margin is sustainable. That's been one of the questions if we think back over the past 18, 24 months, is where is the operating margin going? In 2023, we established a 15% operating margin floor. We delivered 16.4%. And this year, we started the guide at 16.5% to 16.8%. Now we're guiding 17% to 17.4% without the operating margin -- sorry, without the out-of-period adjustment. But look, we are at a level that is sustainable. And I think that's the key message as we've structurally improved our margin. Margins for Williams-Sonoma, Inc. in the mid- to high teens is sustainable over the long term. And it's what is our guidance, and it's what we've been able to achieve.

Got it. And then just to follow up on inventories down 13%. Was that mostly dollars or units?

Well, we report in dollars, in cost dollars. So it was a dollar metric. And overall, our message is our inventories are well positioned to support our business trends.

Your final question comes from the line of Simeon Gutman with Morgan Stanley.

My first question, it's back on gross margin. So you are lapping some supply chain savings. This quarter, you still had a significant gain in the merch margin? And just to clarify, there aren't supply chain or shipping in there. And what drove the merch margin? And if it is the fewer promos, why shouldn't that level hold and we see merch margin gains continue throughout 2024?

Simeon. So let's think about this. In Q1 of this year, we lapped 300 basis points of supply chain headwinds from last year. So there's about 380 basis points between that and the 680 that we reported, excluding the out-of-period adjustment. So it was not just merchandise margins, there were some that were merchandise margins and there were some that were supply chain efficiency. Certainly, in the merchandise margins, we did benefit from lower ocean freight year-over-year. But there is also merchandise margins -- in there is also full price selling. We did continue to reduce promotions versus last year in the quarter. And while there's still some that we can reduce later on, we're starting to lap our efforts last year. And in supply chain efficiencies, the other piece in here is we started -- we over delivered there, but we also started to lap that improvement year-over-year as we progressed through the year. So there's diminishing margin returns here. But look, we feel great about our results. We're starting to lap harder compares in the bottom line, but it's early in the year, and there's a lot of uncertainty.

And then just a follow-up to that. The IMUs or the markups in some of the newness, if that over-indexes, is that a good guide to gross margin or about the same?

It's probably about the same. And there's puts and takes between gross margin and SG&A. But it goes back to how we give our guidance. We guide the top and the bottom line. We're guiding that the next 3 quarters will be essentially flat year-over-year and that there are levers we can pull within there to drive results.

And the newness doesn't come in higher margins than something we've been running. Actually, when we rebuy a new product, we're able to often renegotiate their costs because we're buying more on those efficiencies in the supply chain when we buy more. So that would come a little bit later as we increase the orders. And I will just say another component that is in our numbers is the reduction in costs across the board from our vendors, our vendor partners and really focusing on our efforts to be more accurate on our inventory buys so they can be more efficient in their factories. So that's also been a component of what's been going on and one that should be stable through the back half of the year. Thank you. Well, thanks to all of you for joining us. And I hope you have a wonderful summer, and we look forward to talking to you in the fall. Take care.

This concludes today's conference. We thank you for joining. You may now disconnect your lines.